Construction industry

Construction industry

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  CONSTRUCTION INDUSTRY
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  In the fieldsof architecture and civil engineering, construction is a process that consists of the building or assembling of infrastructure. Far from being a single activity, large scale construction is a feat of human multitasking. Normally, the job is managed by a project manager, and supervised by a construction manager, design engineer, construction engineer or project architect. For the successful execution of a project, effective planning is essential. Involved with the design and execution of the infrastructure in question must consider the environmental impact of the job, the successful scheduling, budgeting, construction site safety, availability of building materials, logistics, inconvenience to the public caused by construction delays and bidding, etc. Construction activity is an integral part of a country’s infrastructure and industrial development. It includes hospitals, schools, townships, offices, houses and other buildings; urban infrastructure (including water supply, sewerage, drainage); highways, roads, ports, railways, airports; power systems; irrigation and agriculture systems; telecommunications etc. Covering as it does such a wide spectrum, construction becomes the basic input for socio-economic development. Besides, the construction industry generates substantial employment and provides a growth impetus to other sectors through backward and forward linkages. It is, essential therefore, that, this vital activity is nurtured for the healthy growth of the economy
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  Break-Up of Constructioncosts Material Equipment Labor Finance Enabling Admin Surplus (%) (%) (%) (%) Expenses Expenses (%) (%) (%) Building 58-60 4.5 11-13 7-8 5.5-6.5 3.5-4.5 5-6 Roads 42-45 21-23 10-12 7-8 5.5-6.5 3.5-4.5 5-6 Bridges 46-48 16-18 11-13 7-8 5.5-6.5 3.5-4.5 5-6 Dams 42-46 21-23 10-12 7-8 5.5-6.5 3.5-4.5 5-6 Power 41-43 21-24 10-12 7-8 5.5-6.5 3.5-4.5 5-6 Railway 51-53 6-8 16-18 7-8 5.5-6.5 3.5-4.5 5-6 Mineral 41-44 20-22 12-14 7-8 5.5-6.5 3.5-4.5 5-6 Plant Source: Construction industry development council
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  Some interesting factsabout the industry • The share of construction sector in gross domestic product (GDP), which was 5.4% in 1970-71, came down to 4.4% 1990-91. Subsequently it picked up and stood at 5.1% in 1999-2000 and now stays at a staggering 8.1% for the year 2011-2012 • Construction industry roughly employees 33million people, more than any other sector aside from agriculture. • The industry contribution to GDP is down from 16 per cent in the boom period, between 2004-08. But it’s still pretty substantial and in absolute terms, the industry has grown. The sector is very fragmented. There are hundreds of mid-sized and small unorganised players as well as a handful of really big players. The big ones (L&T, HCC, GMR) have become developers rather than remaining contractors. • For 2012, projects worth an estimated Rs 140 lakh crore are estimated to be in various stages of the pipeline according to CMIE. The Twelfth Plan alone is supposed to contribute Rs 41 lakh crore worth of infrastructure creation with about half coming from the private sector. Urban development, private sector projects, and so on, make up the rest.
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  DEMAND IN CONSTRUCTIONINDUSTRY Demand originates from different sub-sectors such as public housing, public- sector non-housing, owner-occupied housing and private-sector industrial and commercial, rehabilitation, improvements, repair and maintenance .However, only housing, industrial and infrastructure sectors largely contribute to the construction output in Sri Lanka. It is therefore in this light that output in those sub sectors are analyzed to review the trend of construction. • The demand of construction industry is depend on interest rates, the cost and availability of finance, and government investment decisions. • Government policies will be the key deterministic factor in construction demand. •The cost of construction, land supply and available sources of finance, project delivery systems had a direct bearing on the demand in this sector. •The emergence of private property development companies made a considerable impact on construction demand in this sector, particularly in urban areas where demand grew rapidly with the expansion of the urban population. As a result, condominium style apartments and pre-built luxury housing schemes were built in urban/suburban areas.
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  CHALLENGES FACED BYTHE INDUSTRY The construction sector in India currently faces a number of challenges. The Reserve Bank of India (RBI) raised benchmark interest rates on multiple occasions since March 2010 which increased the overall cost of borrowing. In addition, the private sector deferred its capital expenditure decisions on account of uncertain demand conditions and issues concerning land acquisition; approvals and clearances; fuel security and pricing; counterparty credit risks and policy issues. In FY 11, new projects announcements by the government sector also slowed down due to delays in decision making; lack of stable leadership at key public sector undertakings (PSUs); corruption-related investigations and state elections. A key area of concern is the steady increase in the quantum of stalled projects to Rs. 4.17 trillion in September 2011from Rs. 2.94 trillion in September 2010, representing a 42% increase on a y-o-y basis (15% on q-o-q basis). Consequently, the y-o-y revenue growth of construction companies in Q1/Q2 FY 12 has been the slowest as compared to the past few years. The reduced pace of execution is also evidenced by the significantly lower y-o-y growth of 2.7% (at FY 05 prices) in construction GDP in H1 FY 12 as compared to 7.2% y-o-y growth in H1 FY 11
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  ORDER BACKLOG OFCOMPANIES IN SAMPLE SURVEY Based on the order books of 15 companies covered in the sample, most companies had healthy unexecuted order book levels as of September 30, 2011 with the ratio of (unexecuted) order book to last reported annual revenues ranging from 2.1x to 5.0x and an average of 3.4x. The corresponding averages as of 30 June 2011 and 31 March 2011 were at 3.34x and 3.35x; the relatively flat averages indicate sluggishness in new order inflow and relatively slow execution
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  NEW PROJECTS ANNOUNCEMENT Inthe government sector: New project announcements by the government sector registered an approximate 29% decline in FY 11 over FY 10 due to multiple factors including state elections; lack of stable leadership in some PSUs, corruption-related investigations etc.). Nevertheless, renewed thrust on infrastructure spending led to some improvement in the first two quarters of FY 12.
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  Private Sector(New Projectannouncements): New project announcements by the private sector registered a negative growth for the past two quarters on a year-on-year as well as quarter on quarter basis, with the steepest decline in Q2 FY 12 (-79% y-o-y/-73% q-o-q). The significant drop in new project announcements by the private sector was due to issues regarding land acquisition; securing approvals and clearances; fuel security and pricing; counter party credit risks, policy issues etc. Further, successive hikes in interest rates by the RBI have increased the overall cost of project
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  Some relevant informationand statistics related to construction industry Projects awarded by NHAI(in Kilometers) Outstanding Bank Credits to Road Sector
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  Year-on-Year Growth inKey Financial Indicators for Companies in Sample Revenue growth of companies selected in the sample
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  Construction Industry sharein GDP for the past few years
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  The positive signsthat would benefit construction industry in 2012-2013: Company Larsen & Toubro Ltd. A,C Hindustan Construction Co. Ltd. A,B,C IVRCL Ltd. A,B,C IRB Infrastructure Developers Ltd. A,C Gammon India Ltd A,C Impact factors: A. The Limit for tax-free bonds in the infrastructure sector has been doubled to Rs 600 billion for 2012-2013 vis-à-vis Rs 300 billion in 2011-2012 B. The access to viability gap funding for irrigation projects is expected to facilitate private sector participation in the sector. C. At the corporate level, there has been a reduction in the withholding tax on interest payments of external commercial borrowing (ECB) from 20% to 5% for certain infrastructure sectors.
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  • Research estimatesthe total investments in construction to nearly double over the next five years ended 2015-2016, to Rs 18.4 trillion. The growth will largely be spurred by continuing government spending on infrastructure. Nearly 85 percent of the total investments in the construction sector is likely to be made in infrastructure, specially the power, roads, and urban infrastructure sectors. •Construction investment in individual segment is expected to amount Rs 2.7 trillion over the next five years , with the investment in gas and oil sector being the principal investment •The construction industry’s operating margin in expected to decline by 150-200 basis points by 2013-2014 . The pressure on Industry’s operating margin is expected to continue with the rising share of lower0margin segments like roads, Higher prices of inputs like steel and cement sustained pressure on contract pricing
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  Expected growth inthe next few years 12 10 8 6 4 2 0 2012 2013 2014 2015 The global recession has extended this business cycle to over 10 years now. The next peak is likely to occur only in 2014-15 when the growth would peak 11%, inching up from 8% in 2010-11. Fiscal 2011-12 would see construction industry grow 8.2%. Thus, the growth would once again bounce back and will be faster than the overall GDP growth
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  CONCLUSION The cash flowsand debt coverage indicators of most companies in the construction sector are under pressure on account of higher debt levels; moderation in revenue growth and suppressed profitability. Going forward, we believe that the companies with a favourable capital structure; moving order book; relatively low working capital intensity and low commitments toward equity contribution in BOT projects would be better placed to manage the risks that characterise the current environment. Kanumuri Rajashekar(12020841076) Kumar Vaibhav (12020841079) Meghna Singh (12020841082) Shruti Rauniyar (12020841098) Advait Bhobe (12020841116)